Film Dispute Shines a Light on China’s Foot-Dragging

Stanley Lubman, a long-time specialist on Chinese law, teaches at the University of California, Berkeley, School of Law and is the author of “Bird in a Cage: Legal Reform in China After Mao,” (Stanford University Press, 1999).

China was eager to join the WTO, but to what extent is it willing to abide by the trade body’s decisions?

To get a sense of the answer, consider the case of American films.

A recent WTO decision is supposed to result in the removal of several barriers to the importation of American movies that have collectively been a sore point in Hollywood for years. It’s been exactly a month since a deadline imposed by the WTO’s Dispute Settlement Body (DSB) passed and China has yet to make any substantive move to comply with the trade body’s decision.

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Since China’s accession to the WTO, the country has limited foreign film import and distribution rights first to one and, starting in 2003, to two state-owned companies. It has also barred or restricted foreign invested enterprises (FIEs) from participation in the import of books, periodicals and newspapers, and, in addition to films, audiovisual home entertainment products and sound recordings (This column discusses only the principal issues that were decided regarding films.)

The Chinese government has also mandated review of the content of films or any other cultural goods imported into China, reserving the right under Article XX(a) of the General Agreement on Tariffs and Trade (GATT) to stop them being imported if it is “necessary to protect public morals.” The same two companies that have a lock on importing films, China Film Group and Huaxia, are also responsible for reviewing them to ascertain whether they contain any content that violates “public morals.”

Meanwhile, Beijing continues to maintain a strict quota, currently set at 20, on the number of foreign films that can be imported into China in any given year.

The U.S. initially invoked the WTO dispute settlement process to address the first two issues in 2007, arguing that the exclusion of FIEs violated China’s obligation to treat foreign enterprises the same as Chinese enterprises and that the content review process was overly strict. Under WTO procedures, after Sino-American consultations failed, a panel composed of three experts chosen by the two parties was formed to hear the dispute, much like a court of first instance. (The dispute is discussed in great detail in Elanor A, Mangin, “Note, Market Access in China: Publications and Audiovisual Materials: A Moral Victory With a Silver Lining,” Berkeley Technology Law Journal, vol. 25, 279 (2010)) .

The crux of the issue was a GATT requirement that imported “goods” receive the same basic treatment as domestic goods. China argued that requirement didn’t apply in the case of foreign films because the import and projection of movies are “services” rather than goods.

After two years of deliberation, the WTO panel published its conclusions (PDF), rejecting the Chinese argument on the GATT requirement but essentially accepting China’s contention that it had a legitimate interest in protecting the Chinese people from products “the content of which could have a negative effect on public morals, especially those that depict or vindicate violence or pornography.” Observing that the concept of “public morals” reflects a broad range of social and cultural values prevailing in the states that are members of the GATT, the panel conceded that China had the right to regulate the goods.

The panel also decided, however, that limiting the right to import foreign films to two state-controlled enterprises was inconsistent with WTO standards because there were “reasonably available alternatives,” namely “in-house” content reviews of domestic products, which could be conducted before the goods pass through customs. China had asserted that the import monopoly was necessary for the review process, but in the background there is also the likely effect on competition among distributors if the monopoly is lifted.

China had not offered any evidence that the cost of reviewing the products involved in the dispute would be especially burdensome. The alternative would simply be that content review would be done not by state-owned enterprises, but by government agencies. The panel decided that in the absence of a showing that the reviews advocated by the U.S. would be an “undue burden,” the requirement restricting importation of the goods involved to state-owned enterprises was “not necessary.”

The panel report recommended a request be sent to China to “bring the relevant measures into conformity” with the country’s WTO obligation. China appealed, but the WTO’s Appellate Body (AB) upheld the conclusions of the panel report. Issued in December of 2009, the AB report (PDF) set a reasonable deadline of March 19, 2011 for China to implement its recommendations.

China has not complied. Instead, it submitted a one-page “status report” to the DSB on March 14, 2011, which said that, it “respects the ruling and recommendations of the DSB” but also expressed “serious concerns” about the Report.” Formalistic and uninformative, the one-page ”status report” gives no hint of how or when China will respond to the WTO. It adds that the dispute “involves a number of Chinese administrative measures on cultural products and is embodied with more complexity and sensitivity than other disputes.”

The status report goes on to express the hope that WTO members “could understand the difficult and complicated situation China is facing during the process of implementation,” stating that China had made “tremendous efforts” at implementation and has completed amendments “to most measures in issue.” It concludes by stating that China “believes that this matter will be resolved properly through joint efforts and mutual cooperation by relevant parties.”

This dispute may not end without more proceedings before the DSB. On March 28th, the U.S. stated at a DSB meeting in Geneva that it is “troubled by the lack of any apparent progress by China” on complying with the WTO ruling as well as “incomplete progress” regarding “home entertainment products, reading materials and sound recordings” The U.S. also stated that the parties are discussing the possibility of a (US) request for institution of a ”compliance proceeding” before the DSB. In such a proceeding the U.S. would demand that China be compelled to comply with the AB decision .

Although the U.S. didn’t say as much in its statement, the implication is that a failure by China to comply with the WTO decision would be met with retaliatory trade measures directed against Chinese products.

How the Chinese government plans to adjust importation and distribution rights and content review — and whether the U.S. will find the eventual Chinese response adequate — remains to be seen. Even if China were to comply fully with the WTO’s decision, it’s not clear how that compliance would affect the foreign film quota, which was not specifically addressed in the dispute.

China isn’t the only country to struggle with the conflict between supposedly non-economic domestic concerns and the obligation to abide by global standards on market access.. In 2004, the United States tried to ban Americans from betting on online gambling made available from Antigua by invoking language on “public morals” in the General Agreement on Trade in Services (GATS) identical to the clause in the GATT on which China relied; the U.S. lost (PDF).

Given the current political atmosphere in China, which has seen intensified repression of activists who are deemed to express politically unacceptable views, no relaxation of what may be deemed to be “public morals” can be expected. In the meantime, despite the quota and censorship, foreign films on pirated CDs remain readily available in China.

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